Recently, I have been reflecting on a saying I learned from VC friends when I was living and working in Silicon Valley:
“Always invest in an A grade team with a B grade product rather than a B grade team with an A grade product”.
The presumption is that an early-stage company is growing in a dynamic, rapidly changing environment and what starts out as a product perfectly suited to the market opportunity will lose its edge as the market changes. A great team will, hopefully, always find a way to adapt and make keep their business relevant and valuable while a second rate team will struggle to keep up with the changing world.
I can see this in action with three of my current investments.
A well-resourced ‘A-Team’
In the first example, the CEO/founder and his team are top class, truly entrepreneurial, collaborative with their investors and partners, honest and honourable, dedicated and are right now turning the corner into outstanding success.
Along the way, they have had to deal with a market that has undergone regulatory change, technology change and political change, as well as overcome internal challenges of limited resources, inventor syndrome and changes in key personnel.
This is, at its core, an ‘A-Team’ and it has attracted A grade investors, advisors, directors and partners. It is also maintaining an A grade product!
An ‘A-Team’ of one
In my second example is a CEO/founder who is going it alone. He has avoided having a Board, experimented with business partners, partner businesses, growing staff, shrinking staff and constantly evolving and adapting his product/service offering.
His conscientious focus on ethical business (even when competitors — and his own employees! — stole his ideas, his processes and his documentation) has stood him in good stead. His focus on customer value and understanding his customers’ needs continues to provide him with insights that underpin his competitive advantage. The company is at the top of its market niche and set to do great things.
Intellectual agility, hard work, dedication and a mind open to opportunities and advice have all been hallmarks of this A-Team — even if this team is made up of one person.
Then we come to the third example.
Incompetent or just evil?
In this case, the company had world-beating technology and a window of opportunity to realise a return. My co-investors and I would have readily contribute substantial improvements to the scale and probability of realising that return.
Sadly, the CEO/founder deceived the investors.
He did a very good job upfront of convincing investors that he knew what he was doing, that he recognised his own shortcomings and that he was open to getting assistance and advice. Indeed, he had already been successful at attracting and maintaining a substantial investor for several years before we came along.
Unfortunately, that investor was out of his depth, not knowing how to invest in or grow an early-stage company and, thus, has fallen prey to all the worst mistakes. The most unforgivable of which was, through incompetence or collusion, joining the CEO in his deceptive activities that wasted investors’ funds by distracting the collective effort away from realising the agreed goals.
In that company, what was an A grade technology was largely undermined by a substandard team.
Allocating investors’ money toward high salaries, lining their own pockets, that team has failed miserably. Of course, the main parties blame the failure on everything and everyone else but themselves. When the market found the technology wanting, the team responded by asserting that the technology is perfect and the market doesn’t know enough to recognise that perfection.
This company is doomed to almost certain, imminent failure.
Failure is caused by people
Every failure I can recall in a business where I have worked or invested in has been due to the failure of the people.
Sometimes, it is an innocent result — caused by the wrong person in the wrong place at the wrong time — but, honestly, the players in these dramas are usually good people and, as such, are open to advice and help.
More often, disaster is caused by either a single pivotal individual or a small team of collaborators who hold the view that their interests are paramount over everything and everyone else. In such circumstances, these people fail to recognise what is actually in their interest, instead holding dearly to their egos and blind belief in their own infallibility.
Unethical and immoral behaviour are totally unacceptable in all circumstances. They do not lead to success and they most certainly do not make for a good return on investment.
Judging people is never easy and any early-stage investor worth his/her salt will spend a lot of time constantly working on his/her ability to make good judgements.
Indeed, many of the Super-Angels in the USA rely almost entirely on their ability to judge a person and to do so quite quickly. After all, when you are trying to invest $25k to $150k in one new deal each month, at least, there is not much time for finicky due diligence.
Those men and women each have their own way of meeting and assessing the entrepreneur.
They make their investment decisions based almost entirely on the perceived quality of the founders. There are factors of scale in terms of their own resources and the market in which they operate that enable them to act in this way.
In Australia, we may not have quite the same opportunity but we have plenty of entrepreneurs and innovation. The challenge is to evaluate rapidly and effectively the investment opportunity.
With so much uncertainty in the technology and in the market for an early-stage business, clearly our primary focus is to find those A-Teams with A grade people.
Jordan Green is an experienced executive, entrepreneur, engineer, venture capitalist and Angel investor. He has over twenty-seven years experience in growing and advising technology oriented companies in Australia, USA, Asia and Europe. A Silicon Valley software veteran, Jordan was a founding partner of one of the best performing venture capital fund managers in Australia, he is co-founder and Deputy Chairman of the Australian Association of Angel Investors and Jordan founded and leads Melbourne Angels Inc.